Shares in global cinema operator Cineworld (CINE) sank 25% to 34p on Wednesday after the company lost a court case resulting in potential damages of C$1.23 billion (£720 million).
The wrangle dates to the eve of the pandemic in December 2019 when Cineworld agreed to purchase Canada’s largest cinema chain Cineplex for C$2.8 billion, a deal which shareholders approved in February 2020.
Cineworld subsequently pulled out of the deal in June 2020 amid claims that Cineplex had breached certain terms, while Cineplex counter claimed Cineworld was in breach of its obligations to go through with the acquisition as agreed.
The Ontario Superior Court of Justice has now ruled in favour of Cineplex, awarding it damages of C$1.23 billion for lost synergies and C$5.5 million for lost transaction costs.
Cineworld said it disagreed with the ruling and would launch an appeal, and that it doesn’t expect to be liable for any damages while its appeal is in motion.
DEBT FUELED EXPANSION
As Shares reported at the time of the Cineplex acquisition, investors were concerned about the extra borrowing Cineworld was taking on which pushed its net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio to four times.
Investment director at AJ Bell Russ Mould commented: ‘Cineworld’s hunger for growth has come back to haunt it. The timing couldn’t have been any worse.
‘The pandemic struck and it looked like Cineworld’s only way to survive this crisis was to bail out of the Cineplex deal, given that it had massive debt repayments and suddenly no income.
‘This ruling threatens to put significant financial pressure on the business if its appeal is unsuccessful.’
Cineworld shares have lost around 73% of their value over the last nine months.
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